No. 29: Do Supervisory Disclosures Lead to Greater Bank Transparency? The Role of Enforcement and Market Discipline

Abstract

We investigate how supervisors influence bank transparency through supervisory disclosures and
public enforcement. Upon adoption of the Single Supervisory Mechanism (SSM) for major
Eurozone banks, the European Central Bank (ECB) as the new supervisor undertook a
comprehensive review of bank balance sheets and publicly disclosed the results of this Asset
Quality Review (AQR). The AQR disclosures revealed what the ECB perceived to be a substantial
overvaluation of bank assets, and in particular problem loans. The magnitude of the AQR
adjustments varied substantially across supervised banks. We exploit this firm-level variation as
well as the staggered introduction of the SSM to analyze the change in affected banks’ reporting
behavior and transparency. The ECB’s preference for more conservative reporting is associated
with higher levels of loan loss provisions and non-performing loan classifications in the following
periods. Pointing at the role of enforcement institutions, this reporting effect is particularly
pronounced for firms whose prior national supervisors were more likely to be captured by political
interest. At the same time, corresponding positive liquidity effects are concentrated among SSM
banks that were exposed to potential pressure from market forces. Our findings suggest that
supervisory disclosures are potentially effective in establishing greater transparency of the banking
sector, but depend on the presence of firm-level incentives that help establish market discipline.

Participating Institutions

TRR 266‘s main locations are Paderborn University, HU Berlin, and University of Mannheim. All three locations have been centers for accounting and tax research for many years. They are joined by researchers from LMU Munich, Frankfurt School of Finance and Management, WHU – Otto Beisheim School of Management, European School of Management and Technology in Berlin and Goethe University Frankfurt who share the same research agenda.